The market reaction to the Eurozone GDP data has been very interesting today. Despite disappointing data, markets and investors appear to be fairly sanguine this morning. Perhaps it is a view of another day where geopolitics in Ukraine are not making headline news, but nonetheless markets are fairly stable. Equity markets are higher and the earlier strength for the dollar has completely turned around. Volatility in sharp decline is reflective of this as the VIX again fell yesterday and looks to be retracing the move higher seen in late July.
Traders will now be looking towards the weekly jobless claims in the US (at 13:30BST) as the main data release of the afternoon. Weekly jobless numbers have been falling consistently for months now and often beating expectations. The consensus is for 295,000 which would be a jump of just 6,000 on the week. Anything under 300,000 would be dollar supportive though.
German GDP contracted in Q2 by 0.2%, with Italy also in negative territory. French GDP was a hair’s breadth below zero, whilst the government also cut its forecasts for GDP in 2014 and 2015 in addition to announcing that it would miss its public deficit target this year. In light of the individual countries’ performances, perhaps the market had feared that the Eurozone as a whole would move back into contraction, as since a figure of 0.0% was announced, both the euro, the DAX and CAC have all rallied.
This is seen as a slightly strange situation as after Eurozone inflation (HICP) was confirmed at 0.4%, the yields on Eurozone sovereign debt continued to fall away. In fact this morning, the yield on the German Bund fell below 1.00% for the first time. The continued attraction of German debt even at yields of such incredibly low levels just shows the fears that investors have as disinflation in the Eurozone continues to threaten a move into deflation. Bond yields falling and equity markets rising are not usual bed fellows, but could suggest the pressure on the ECB to engage QE is rising.
Despite the apparent dollar strength of recent weeks, I am impressed by the support for the euro. With EUR/USD continually finding support above $1.3330 the outlook is improving. The bullish divergence on momentum indicators is still suggesting that downside potential is limited and a technical rally is trying to come through. It is still looking like a struggle, but I believe it will be seen in due course. Yesterday’s rally high around $1.3410 is resistance but the big level to overcome is $1.3445. As I alluded to in today’s Morning Report, perhaps a good way to play a euro rally is against sterling on EUR/GBP which has completed a base pattern and continues to improve.
Cable remains under pressure with key supports being broken in recent days. However, the RSI is again extremely oversold (currently around 26) but this is the only reason why you might be willing to buy for a rebound, as there is very little else to be positive about on GBP/USD now.
Equities are bouncing as the DAX and the FTSE 100 are both around 0.5% higher. Perhaps investors were concerned the Eurozone GDP would be even worse than it proved, but markets are fail positive today. The DAX is the highest since 1st August, whilst both the DAX and FTSE 100 have completed small intraday base patterns. The German index has pushed above 9199 which completes a head and shoulders base and implies a move in the DAX back into the 9400/9600 resistance band. The move on the London market above 6649 also completed a head and shoulders base pattern on the hourly chart. This breakout level has become the new support as the FTSE 100 begins to push its way towards the implied target at 6770.
Once again it looks as though the early positivity in gold has fallen by the wayside, with the precious metal now lower on the day. There is little sign of a breakout on gold from the consolidation phase above $1305 and below $1317.60 built over the past few days. Until this consolidation ends, it is very difficult to get excited about gold. Surprise, surprise as the geopolitics have taken more of a back seat role, so the gold price struggles to find direction. It will probably need a new phase in Ukraine geopolitics to break the consolidation now.